Northern Beef: EB-5 can work in state hands

Vermont touts effectiveness of running program that S.D. made private

Nov. 9, 2013

Mike Rounds

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CONCEPT: The Northern Beef Packers plant was an ambitious attempt to bolster South Dakota’s economy by slaughtering the state’s cows in Aberdeen instead of shipping them out of state. FOREIGN INVESTORS: Through years of development and false starts, most of Northern Beef’s funding came from more than 100 foreign investors under the federal EB-5 program, where foreigners could get green cards for investing $500,000 in American businesses. EB-5: The state of South Dakota worked closely with the EB-5 program. It was promoted by Richard Benda, who then was secretary of Tourism and State Development and oversaw overseas investors. State official Joop Bollen also created private companies to manage EB-5 investments. Bollen resigned the same day he signed a contract for his own business to handle the state’s EB-5 program. FEES: Private companies established by Bollen to recruit foreign investors made millions by taking a cut of the investments made by foreign investors. OFFSHORE: Secret investors offered a $30 million loan to the beef plant through companies incorporated in the Caribbean. INVESTIGATIONS: State and federal officials are investigating Northern Beef, its handling of the EB-5 program, and South Dakota’s economic development office. BENDA DEATH: Meanwhile, Benda died in late October from a gunshot wound. His death is being examined by authorities. UNAPPROVED: Bollen began recruiting foreign investors to EB-5 projects not approved by the state. TYPICAL: The loan model used to draw investors for Northern Beef mirrored industry standards in how it was structured and regulated, a national expert says.

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The only state-run EB-5 program in the country — in Vermont — says it benefits from being publicly controlled.

The controversial visa investment program lets wealthy foreigners get green cards in return for investing $500,000 in U.S. projects that create jobs. In South Dakota, more than a dozen projects received EB-5 funding. Many were successful, but some failed, most notably the Northern Beef Packers plant.

But despite Vermont’s claimed benefits, private and quasi-private EB-5 programs predominate across the U.S. Most cities and states in the EB-5 game choose, as South Dakota eventually did, to contract with a private company to run the program.

That’s a decision Vermont has never been tempted to make, said Brent Raymond, executive director of Vermont’s state-run EB-5 “regional center.”

“Because of our track record, it attracts people from all over the world that aren’t even sure what ‘Vermont’ is,” Raymond said. “I think it provides comfort to a lot of investors and investor representatives that there’s an independent third party that’s approved a project, but in addition to (federal agencies) is constantly looking at the project and meeting with them on a quarterly basis.”

It’s unclear exactly why South Dakota handed its EB-5 program to a private company, SDRC Inc., after five years under a state agency.

The impetus came from Northern State University, which directly oversaw South Dakota’s regional center and didn’t think it belonged at the university. University president Jim Smith in 2009 came to Richard Benda, then-secretary of Tourism and State Development, to discuss the problem. Smith said Benda proposed letting current EB-5 director Joop Bollen continue working with EB-5 with a private company.

Both Smith and Gov. Mike Rounds accepted that proposal.

Private money going to private companies

Last week, Rounds said he recalled Benda’s pitch for the privatization being focused on the benefits of loan-based EB-5 investments over the standard equity investment.

But Raymond and EB-5 expert Michael Gibson of USAdvisors.com said there’s no reason a state agency can’t handle EB-5 loans.

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Vermont’s regional center lets businesses seeking funding decide which EB-5 investment model to use and, in recent years, most have been chosing loans.

Later, Rounds told The Associated Press that it was a strategic decision to give EB-5 oversight to a private company because EB-5 involved private money going to private companies.

Closer oversight under state control

An EB-5 investment in Vermont has some key differences with how similar investments unfolded in South Dakota.

For one thing, Vermont’s regional center takes a cut of only $1,500 per investor, which it uses to pay most of its expenses. Raymond said his office has a small taxpayer-funded budget but mostly relies on fees.

Investors in South Dakota projects run by SDRC, on the other hand, paid $10,000 per year per person — a potential revenue of millions of dollars for the private company. It set aside a small portion of that to pay state expenses related to the EB-5 program.

The state-run program also means state officials keep a closer eye on projects.

“Once we approve a project, we meet with them on a quarterly basis, we actively look and we view the projects, we look for any evidence of improper marketing, any evidence of anything even becoming potentially questionable, and we quickly seek out solutions to immediately take care of any concerns that we have,” Raymond said.

That happened earlier this year, when Vermont canceled EB-5 funding for a retirement home after becoming concerned about the project’s principal partner.

Loans under control of private projects

EB-5 loans in Vermont generally are under the control of private projects, not the state-run regional center. For example, if a ski resort project in Vermont wants to borrow $25 million from 50 foreigners, those investors each will put $500,000 into a limited partnership controlled by the ski resort’s owners. The limited partnership then makes a single loan to the ski resort.

In South Dakota, it was SDRC that controlled each loan’s limited partnership, through a wholly owned subsidiary.

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Raymond and other Vermont officials will travel overseas with EB-5 projects, but he said they keep a firm limit on how much promoting they’ll do.

“We do directly promote the state of Vermont, and why it’s good to do business in the state of Vermont,” Raymond said. “We don’t pass the line of saying, ‘We think you should invest in Project X.’ ”

Under Rounds, Benda frequently traveled overseas to promote EB-5 projects in the state, though it’s uncertain exactly what form his promotion took. Several Chinese investors stated in a letter to the South Dakota Governor’s Office of Economic Development that they were “in part induced into investing into (Northern Beef’s EB-5 fund) by representations made by then-Secretary of the Department of Tourism and State Development, Mr. Richard Benda.”

Benda traveled overseas to promote EB-5 projects both before and after EB-5 management was handed off to SDRC.

Drawbacks to state-run model

There are several reasons why most or all of the nearly 325 EB-5 regional centers in the U.S. are run by private companies.

Gibson said perhaps the biggest is state officials don’t have the expertise to recruit foreign investors.

“They have no connections to foreign investors,” Gibson said.

“They don’t know China. So they hire these independent firms who basically come in and manage the funding.”

Another benefit is legal. Because EB-5 investments are required to have risk, there’s the potential for things to go south — and spawn lawsuits.

“Somebody may have said: ‘All of this is unregistered, unregulated activity. We’re going to put it in a container somewhere else so if something happens, we can say it wasn’t under our roof,’ ” Gibson said. “That’s the problem Vermont is going to have, if there’s any South Dakota-like failures.”

Raymond said liability is part of the risk Vermont accepts, running its own program. But he said that’s outweighed by benefits of keeping direct control — which can let the state shut down risky projects early.

Because Vermont doesn’t get a large cut of EB-5 investments, as is standard for private regional centers, Raymond said the state doesn’t have an incentive to approve marginal investments.

“We’re much more conservative about approving projects, potentially, than an entity that would be hired by a regional center as a third party to run it and potentially be motivated by approving a project so that their profitability can increase,” he said.